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Pensions - what has changed?

Date:

17 June 2014

In the recent Budget, George Osborne announced some important changes to the existing pension scheme. Particular stresses were placed on how people can access their pension plans (excluding final salary schemes) when they come up to retirement age. We think that the changes are likely to be good for our clients, as well as encouraging greater use of pensions.

But we recognise that the rules are pretty tricky to work out, and so instead of going through these in more detail, have a think about whether some of this might be relevant for you.

If you are about to retire (you can take your pension from age 55), but your pension fund pot is less than £30,000, then you can withdraw the whole amount. The first 25% is tax free, and the balance is taxed at your income tax rate. This has been the case since 27 March this year.

If you haven't yet made up your mind what to do with your pension pot (whether you are coming up to retirement or are already retired), then from April 2015 you have more options, because you will no longer need to buy an annuity with your pension fund. What's an annuity? It's a policy which you buy, and which guarantees to pay you a certain amount as an income for the rest of your life. The trouble with annuities is that rates are relatively low, and have been for some time, and once you take one out, you are locked into that rate for life even if rates were to rise. So this change gives a lot of extra flexibility.

What's the alternative to an annuity? From April 2015, you will be able to withdraw all of your pension fund, either gradually over a number of years, or at one go. If you are taking money out, other than the 25% tax free lump sum, you will be taxed on the withdrawal as if it is your income in that tax year, so you need to be careful about amounts, and what income tax rates will apply.

If you want to make some decisions before April 2015, you need to be careful, because the pension market is in a bit of a state of limbo, and we expect that it will change a lot between now and April. In particular, annuity rates might change significantly. We can help you with this, and make sure you understand all of the options before making any decisions.

Are you worried about whether the 25% tax free lump sum rules are changing? The good news is that there are no plans to take that away. This can be a really good way of getting funds out for further investment, or perhaps repaying a debt (e.g. a mortgage).

What if you've already set up an annuity? You will have no choice but to remain with the status quo.

If you are already taking some of your pension out by way of "income drawdown", then you might be able to change the arrangement, but the timings of this need to tie in with the anniversary of your last review.

We don't think that you should take any decisions about your pension without speaking with an expert.

Disclaimer

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers. Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.

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